China Watch Blog

China Watch Blog has learnt that Mainland China will be able to exert greater influence in international affairs if more countries adopt the yuan as a reserve currency, the head of the Hong Kong bourse said.

“China is becoming the world’s second-largest economy, and in order for it to play that role, the currency needs to be a reserve currency,” said Charles Li, chief executive of Hong Kong Exchanges and Clearing Ltd.

Speaking at a meeting of the Foreign Correspondents Club in Hong Kong, Li said China does not have “proportional” say and influence in international economics and finance, largely due to its currency’s lack of international standing.

“If the mainland China’s trading partners accept the yuan as a settlement currency, it will expand China’s influence in international trade, and increase the autonomy and flexibility of the yuan policy,” he said.

China, whose economic size has surpassed that of Japan this year, has been seeking to reduce its reliance on the U.S. dollar and promote the yuan as a global currency.

As part of such a scheme, the Chinese central bank started to allow exporters and importers in 20 cities and provinces across China to settle cross-border trade deals in its currency.

To further boost the use of yuan, the China authorities said it will allow overseas financial institutions to invest in the country’s interbank bond market on a trial basis.

Li was confident that Hong Kong has a competitive edge over other Chinese cities to become a hub for trading the yuan, making it the ideal place for the Chinese government to start expanding the use of the Chinese currency.

“Hong Kong has been serving as the mainland’s gateway of trade for decades and it is already a leading international financial center,” he said.

“Thus, it provides China’s trading partners the political, economic and legal infrastructure and credibility to experiment with the use of the yuan offshore.”

The chief executive of HKEx expected that the yuan will steadily undergo three stages of adjustment before getting fully accepted internationally — becoming a currency of trade in 5 to 10 years, a currency of investment after 10 years and ultimately a reserve currency in 20 or more years.